Compare the alternatives shown below on the basis of their capitalized costs, us
ID: 1201286 • Letter: C
Question
Compare the alternatives shown below on the basis of their capitalized costs, using an interest rate 12% per year, compounded quarterly. (10 points)
Alternative
Alternative
Alternative
A
B
C
First
–200,000
–300,000
–700,000
cost, $
Quarterly
36,000
32,000
40,000
income,
$/quarter
Salvage
50,000
120,000
100,000
value, $
Life, years
3
6
It was my answer but I got points off because of the incorrect interest rate. Please find out where I got wrong.
Effective interest rate = (1+0.12/4)4-1 = 12.55%
AWA = -200,000(A/P, 12.55%, 3) + 36,000 + 50,000(A/F, 12.55%,3)
= -84,057.92+36,000+14,7439.47 = -33,318.45
Pcap A = AWA / i
= -33,318.45 / 0.1255 = -265,485.65
AWB = -300,000(A/P, 12.55%, 6) +32,000 + 120,000(A/F, 12.55%, 6)
= -74,100+32,000+14,583.15 = -27,516.85
PcapB = -27,516.85 / 0.1255 = -219,257.77
PcapC = -700,000+40,000 / 0.1255 = -381,275
Alternative
Alternative
Alternative
A
B
C
First
–200,000
–300,000
–700,000
cost, $
Quarterly
36,000
32,000
40,000
income,
$/quarter
Salvage
50,000
120,000
100,000
value, $
Life, years
3
6
Explanation / Answer
I have got wrong at few places
1. Cost is in the beginning of the project , so it will not be discounted and will stay $200000 , 300000 and 700000 only for options a, b and c.
2. The income is quarterly, i.e Four times in a year and this will be discounted for each of the 3 years to bring it to the present value.
If you don't understand anything then comment , i'ill revert back on the same .:)
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